The Broadcasters Transition Date Roulette: Strategic Aspects of the - - PowerPoint PPT Presentation

James Prieger

James.Prieger@pepperdine.edu

James Miller

JamesMillerEsquire@gmail.com

The opinions expressed are those of the author and do not necessarily represent the views of the Federal Communications Commission or the United States Government;

The Broadcasters’ Transition Date Roulette: Strategic Aspects of the DTV Transition

Disclaimers...

The opinions expressed are those of the author and do not necessarily represent the views of the Federal Communications Commission or the United States Government.

The opinions expressed are those of the author and do not necessarily represent the views of the Federal Communications Commission or the United States Government;

And More Disclaimers... 本資料の位置付け否認の告示

• ここでは、英米法の一般的な解説を述べており

、決して一定の事例に適した法律相談などでは ないことを承知した上で、ご参考にしてください。 本人の見解によるものであり、アメリカ合衆国そ の他の代弁ではないこともご承知下さい。

The opinions expressed are those of the author and do not necessarily represent the views of the Federal Communications Commission or the United States Government;

Introduction DTV Regulatory Background DTV Technical Issues DTV Markets and Strategic Issues Econometric Primer and Model Data and Empirical Results

Presentation

The opinions expressed are those of the author and do not necessarily represent the views of the Federal Communications Commission or the United States Government;

The Stations Dilemma

 Full-power broadcast stations required to

transition from NTSC to DTV by Transition Deadline

 Stations offered opportunity to go in

advance of the deadline

 Power and other costs incurred prior to

completing transition

 Potential loss of add revenue to

competitors for early transition

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Furthermore, we expect that many stations will transition early Furthermore, we expect that many stations will transition early and begin operating their final post-transition facilities in and begin operating their final post-transition facilities in advance of the deadline and the onset of the winter months. advance of the deadline and the onset of the winter months.

Third Periodic Review of the Commission’s Rules and Policies Affecting the Conversion To Digital Television, MB Docket No. 07-91, Report and Order, FCC 07-228, 23 FCC Rcd. 2994, 3017 para. 41 (rel. December 31, 2007) (Third Review Report and Order)

DTV Regulatory Background

 Spectrum Reform

 Public Safety  Upper 700 MHz

 Digital Media, Convergence, and HDTV  Service Replication/Maximization

 Grade B Contour

 Hard Dates (1996 Act, 1997 Budget Act)  96 Act and ATS 5th R&O  85% Threshhold - 1997 Budget Act

 Feb. 17, 2009 – Deficient Reduction Act of 2005

 Postponement - June 12, 2009 - DTV Delay Act

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

DTV Regulatory Background Early Termination

 Prior to November 19, 2008

 90 day advance filling  approval required

 November 19, 2008 ~ February 16, 2009

 Streamlined procedures within 90 days of Feb. 17, 2009  30 Day advance notification of date to terminate

 Early Termination After Delay

 “Early Termination” On Feb. 17, 2009 subject to prior rules  After March 14, 2009 under 30 day filling and other

requirements (Nightlife)

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Technology Opex Concerns

 Power Considerations

 Power – Distance  Power – Frequency  Power - Digital vs. Analog

 Virtual Channels

 Flexibility  Requirement to Identify as NTSC Channel

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Technology Adoption Concerns

 Consumer Antenna  Analog-Digital Converter Box  ATSC Tuner “Hybrid” Devices  Coverage and Loss

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Market Dynamics

 Stations  Networks  Affiliate  ONO  Ownership Restrictions  Dual-Network Rules

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Econometrics Background

 Quantitative and Statistical Methods Applied to Economic

Principles

 Understanding Statistical and Economic Significance

(independent and dependent variables)

 Methods

 Data Sets  Regression  Least Squares (minimize the sum of squared distances between data

points for fit) and Single Equation

 Simultaneous Equations, Non-Linear and Other Methods

 Inverse Logistic Function “logit” - logit(p) = log (p/(1-p))  Probability Units / probits  Tobit Model

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Broadcasters' “Prisoners Dilemma”

Strategic Considerations

 Revenue from advertising pq (q station’s viewership)  C = F + wx (F includes labor, rent, capital, and other non-power costs, w is the

price of electricity, and x is the amount of electricity used)

 Action “a” available to each station is transition early to digital and stop analog

(action a = D), or continue analog broadcasting (action a = A)

 For station switching early when the other station continues analog

broadcasting, assume a known probability that something goes wrong causing an expected fraction i of original qi0 viewers to switch to other station (station risk from action D is losing viewers to the other station)

 Benefit for the station of transitioning early is the power savings b/c takes less

power to broadcast DTV than in analog - x(ai) {xiA,xiD}, with xiA > xiD

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Setting up the Game

d

i = p q i 0 expected lost revenue from

transitioning early 

i = w(x i A – x i D) cost savings from

turning off analog

Station 2 A D Station 1 A pq10 – C1(A), pq20 – C2(A) p(q10 + 2q20)–C1(A), p(1 – 2)q20 – C2(D) D p(1 – 1)q10 – C1(D), p(q20 + 1q10) – C2(A) pq10 – C1(D), pq20 – C2(D)

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Setting up the Game

If station 1 expects that station 2 will choose to stay with analog (action A), then (comparing the payoffs to 1 in the first column of the bimatrix above) 1 chooses to coordinate its actions and also stay analog if and only if d11 This condition states that station 1 is willing to coordinate

• n action A

if the expected costs

• f transitioning (d1)
• utweigh the

benefits (the cost savings 1)

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Station 2 A D Station 1 A pq10 – C1(A), pq20 – C2(A) p(q10 + 2q20)–C1(A), p(1 – 2)q20 – C2(D) D p(1 – 1)q10 – C1(D), p(q20 + 1q10) – C2(A) pq10 – C1(D), pq20 – C2(D)

Setting up the Game

If, instead, station 1 expects that station 2 will choose to switch early (action D), then (comparing the payoffs to 1 in the second column of the bimatrix above) 1 chooses to coordinate its actions and also play D if and

• nly if d21.

If not, then the expected benefits of letting station 2 move first (d2) would outweigh the costs of transitioning and station 1 would play A.

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Station 2 A D Station 1 A pq10 – C1(A), pq20 – C2(A) p(q10 + 2q20)–C1(A), p(1 – 2)q20 – C2(D) D p(1 – 1)q10 – C1(D), p(q20 + 1q10) – C2(A) pq10 – C1(D), pq20 – C2(D)

Setting up the Game

Given that the decision facing station 2 involves the same considerations, it is apparent that Nash equilibrium thus depends on the size of i relative to d1 and d2, for i = 1,2.

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Station 2 A D Station 1 A pq10 – C1(A), pq20 – C2(A) p(q10 + 2q20)–C1(A), p(1 – 2)q20 – C2(D) D p(1 – 1)q10 – C1(D), p(q20 + 1q10) – C2(A) pq10 – C1(D), pq20 – C2(D)

Nash Outcomes

Case 1 – Neither Station Switches Early

 Both stations face small cost savings from transitioning relative to

expected lost revenue

 Classic Prisoners’ Dilemma: both stations would like to end up in the

(D,D) cell of the game, where operating costs are lower, but have incentive to stay analog to avoid giving the other firm an advantage.

Case 4 - Both Stations Switch Early

 Both stations face large cost

savings from switching early relative to the expected gain of viewers from the other station if delaying

 Difference large enough that the

aspect of the Prisoners’ Dilemma disappears

Case Conditions Nash equilibrium 1 d1  1 and d2  2 (A, A) 2 2  d1 < 1 (D, A) 3 1  d2 < 2 (A, D) 4 d1 < 2 and d2 < 1 (D, D)

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Nash Outcomes

Case 2 & 3 - Non-coordination outcomes

 One of the stations’ electricity cost savings

• utweighs its potential lost viewership, and

switches early

 Other station’s relatively

small electricity cost savings lead it to wait, hoping to gain viewers from the other station.

Case Conditions Nash equilibrium 1 d1  1 and d2  2 (A, A) 2 2  d1 < 1 (D, A) 3 1  d2 < 2 (A, D) 4 d1 < 2 and d2 < 1 (D, D)

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Conclusions from the Formal Game

 Formal game confirms

 Stations will coordinate on delaying transition when their own cost savings

are small relative to risk of losing viewers.

 Stations will coordinate on transitioning when their prospect of gaining

viewers from the other station is small relative to their cost savings.

 Here the strategic element of the decision of how the other station’s

decision affects your station’s profit is apparent.

 Less obvious result:

 Stations will not coordinate their actions when the expected cost of one

station transitioning unilaterally (di for station i) falls midway between the electricity cost savings of the two stations.

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Implication from the Model

 Each station is more likely to transition early the greater is its.

 This implies that higher electricity prices and greater power savings from

transition make the decision to transition early more likely.

 Each station is more likely to transition early the lower is its d.

 This implies that a lower probability of losing viewers, a lower number of

viewers potentially lost, and lower ad prices make the decision to transition early more likely.

 Each station is more likely to transition early the greater the

difference between its  and rival’s d.

 Further implies that a lower expected number of the rival’s viewers

potentially gained, and (as in (2)) lower ad prices make the decision to transition early more likely

di = pqi

0 expected lost revenue from transitioning early

i = w(xi

A – xi D) cost savings from turning off analog

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Empirical Results & Models - Data

 Stations Decisions

 FCC reports

 Stations Characteristics

 DMA, state of location, and network affiliation of a station (if

any) from Warren’s TV and Cable Factbook

 Power Characteristics and station’s digital broadcast

footprint from FCC

 Market Info

 DMA level variables from the SRDS Media Solutions

database (includes demographic variables from Claritas and ad price data from SQAD)

 Data from Nielsen on the number of TV households in each

DMA

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Market-Based Empirical Results & Takeaways

 larger markets show less early transitioning is in accord with

implications 2 and 3 from the model

 early switching displays a U-shaped correlation with age of the

household head

 youngest and oldest age categories, correlation is positive, while it is

negative for the middle ages

 Possible artifact of the data or Demonstration of Baby Boomer and

GenX Demographic Advertising Value

 Highest income brackets also negative correlation

 High income groups also valuable viewers for ad sales

 Only significant racial and ethnic correlation is a negative

correlation with fraction of population that is Hispanic

 Hispanics third most sought-after demographic group

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Market-Based Empirical Results & Takeaways

 Transitioning early is negatively (but not significantly)

correlated with the number of coupon requests, households, and OTA-only households on the NTIA waitlist at the time of the transition

 Measures of lack of readiness serve as proxies for   Nielsen’s two measures of “unreadiness”, percentage of partially and

completely DTV-unready households also negatively correlated (Only latter is significant)

 Implications 2 and 3 predicting higher ad prices associated

with less early transitioning also supported by empirical results (however not statistically significant)

 Unemployment rate in DMA not significantly correlated with the

transition decision, although model suggests local economic conditions affecting local ad prices may be

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Station-Based Empirical Results & Takeaways

 36% of the 1,747 stations full-power commercial and non-commercial

stations broadcasting at the time of the transition transitioned early

 Variation among networks--three traditional networks more

conservative than most others, switching early only 30-33% of the time

 FOX and the CW were average,  Ion and Univision were far below average (16% and 17%, resp.).  PBS and stations in the “other” category (independents, non-PBS public or

educational stations, and niche networks) were more likely to switch early than average (44% and 40%, resp.)

 PBS does not rely on paid advertising and viewers may be less likely to turn to other

networks should problems arise

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Station-Based Empirical Results & Takeaways

 Consistent with correlations found in the DMA-

level analysis, and consistent with the implications of the model, negative coefficients found for Hispanics, the prime age group, and high-income households

 Coefficient for the Asian group is positive,

possibly indicating that advertisers perceive them to be a less-desirable demographic segment

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Station-Based Empirical Results & Takeaways

 Results generally in line with the theory, with a few exceptions.  The alternate measure of market size, population covered, is highly significant, in

accord with implication 2.

 More DTV interference leads to a lower propensity to switch early, also in accord

with implication 2.

 Both electricity prices and the change in ERP have negative coefficients, in accord

with implication 1, but are insignificant.

 Ad prices and more viewers losing signal after transition are negatively (but

insignificantly) correlated with switching early, in accord with implication 2.

 The two strategic variables, the population covered by and the DTV interference of

the other stations in the DMA, have positive coefficients as predicted by implication 3, although only the former is significant.

 One result does not follow the theory.

 Coupon waitlist coefficient is positive (but insignificant), while implication 2 suggests it should

be negative.

 However, no statistically significant refutations at the 5% level of our theoretical model.

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

Conclusions and Applications

 Model provides a useful tool for understanding both effects of DTV

transition regulatory efforts on achieving the important policy goals as well as strategic thinking of broadcasting entities

 Paper explored and tested assumptions about model using

stations’ decisions and other data from broadcasting industry and presents promising empirical results

 Examinations of data yield results that are in line with predictions of

the model

 Further work in this area could provide greater insight into stations’

decision making process and ultimately help market observers and regulators evaluate success of regulatory efforts

The opinions expressed are those of the author and do not necessaricly represent the views of the Federal Communications Commission or the United States Government.

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